The Lincoln Plawg - the blog with footnotes

Politics and law from a British perspective (hence Politics LAW BloG): ''People who like this sort of thing...'' as the Great Man said

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Sunday, November 16, 2003

Bolivia and gas: some pieces of the puzzle come together

Rather than look for headlines to rip from, I've been trying to get my head round the issue that, nominally, at least, sparked the revolt that topple former president Gonzalo Sánchez de Lozada [1]: the proposal to export Bolivian gas (in liquid form - LNG) to California and Mexico via Chile.

The line of the street opposition [2] was that this was an Eldorado which traitors in government had handed over to the gringo (no doubt for a modest consideration) in a deal from which the Bolivian people would get peanuts. (The fact that this national treasure would, on its way, pass through long-time enemy Chile put the tin lid on it!) They proposed renationalisation of the oil and gas industry and industrialización - the use of these resources to produced value-added goods in Bolivia for import substitution and export [3].

Meanwhile, President Carlos Mesa is conducting a mass debate on the future of the industry, inviting no fewer than 229 organisations to comment on
tres temas importantes: la modificación a la Ley de Hidrocarburos, el rol que debe asumir Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) y sobre la industrialización del gas.

At which point, there is nothing for it but to attempt some kind of explanation of how we got to where we are on Bolivian gas. It'll take several pieces, and it's quite likely that, as we go, the process will reveal stuff that is wrong or misleading in earlier pieces.

However, a journey of a thousand miles...

In the beginning, Bolivian oil was nationalised. Following World War 1, the dominant (sole?) company with concessions was Standard Oil of New Jersey; after the crazy Chaco War (1932-35) with Paraguay, Standard Oil was expropriated by the Bolivian state, and compensation agreed only in 1942. Meanwhile, in 1936 Yacimientos Petrolíferos Fiscales Bolivianos was set up as a state corporation to exploit Bolivia's hydrocarbon reserves [4].

The Bolivian Constitution still provides (in Article 139) that hydrocarbon deposits belong to the state.

And for a long time, YPFB granted concessions on behalf of the state to oil companies which explored, developed and produced.

Meanwhile, Bolivian history moved on: in 1982, the last military government vacated office; a civilian government under Hernín Siles Zuazo made a hyperinflationary Horlicks of the economy; in 1985, leader of the 1952 revolution, Victor Paz, took over with a Washington Consensus policy, including privatisation; privatisations under the 1989-93 government of Jaime Paz Zamora led to corruption, such as to bring the idea into disrepute.

When Sánchez de Lozada took over (for the first time) in 1993, a third way was sought: a method of privatising, and funding capital projects in, large state enterprises in such a way as to curb the corruption involved in straight sales. Hence the cunning plan of capitalización: instead of selling the stock (shares) in state companies to investors, commercial concerns would inject capital for up to at total of 50% of the equity, and the remaining 50% would become a sort of pension fund for the Bolivian people.

As far as YPFB was concerned, it would first be broken up into separate companies owning the refineries, the pipelines, etc, and investors would subscribe shares in those companies.

In parallel, there was a reform of the legal and tax regimes applicable to hydrocarbons: concessions would in future be offered in the form of so-called contratos de riesgo compartido (CRC)- which would give concessionaries a free hand in the choice of markets for the oil and gas they produced (once domestic consumption and existing YPFB export contracts had been satisfied). And, as an attraction to potential investors, a large export contract with Brazil for the supply of natural gas was to be entered into [5].

The reforms were successful, insofar as the separate companies - including two exploration and production companies, Empresa Petrolera Andina and Empresa Petrolera Chaco - found foreign oil companies to take up the equity on offer; and the Brazil contract was duly signed.

At least two issues from the capitalisation process continue to cause concern [6]:
  1. the amount of oil and gas (O&G) reserves passed to the Andina and Chaco companies under the CRCs awarded to them - some wild numbers seem to be being quoted; and

  2. the bizarre classification of certain long-standing O&G fields as new - which gets them a privileged tax status.

(In fact, the amount of reserves passed to Andina and Chaco as part of the capitalización was relatively small - around 10% of estimated total gas reserves, for instance [7]. The 50% private share in Andina is now owned by Repsol. Andina now has other interests beyond those it acquired at the time of capitalisation.)

Now (in 2001) enter the US export proposal. The gas field with the biggest reserves is Margarita, in the Caipipendi block in Tarija department: some 13Tcf [8] out of a total of around 50Tcf for the entire country.

The owners of the Margarita concession - Repsol, British Gas and Panamerican Energy - form a consortium, Pacifica LNG, to build a pipeline from the Margarita field to the Chilean port of Mejillones, a liquefaction plant there and three purpose-built vessels to carry the LNG to California. The total investment would be $5-7bn. Exports are proposed to rise to a plateau of around 1Bcf a day.

Leaving aside the Chilean and industrialización issues, one key question is whether the price is right. Prices paid by Brazil for Bolivian gas (at the well-head - transport costs are reckoned separately) have ranged around the $1.50 per Mcf mark [8]; the proposed wellhead price for exports to the US from the Margarita field is apparently around $0.60 per Mcf.

Of this, the Bolivian state would be entitled to a royalty of 18% [9]. There are income taxes to pay as well - but oil companies don't seem to pay any [10].

(I am not clear why the Margarita price should be so low. Or is 60 cents the cost of production?

Of course, the purchasing consortium, Pacifica LNG, and the sellers of the gas are the same people. In theory, they could charge any price they liked. I'd assumed that, for the purpose of calculating the royalty, a formula would be fixed, based on world prices. According to Article 50 of the Hydrocarbon Law [11]), however, the royalty on exported hydrocarbons is calculated on the actual sale price. Seems too easy!)

Beyond the price to be paid under any US export contract is the size and significance of gas deposits in Bolivia generally. Key is the fact that gas reserves - P1 and P2 - grew from 6 Tcf to 47 Tcf between 1997 and 2001 [12]. And around half the country's acreage has O&G potential. Gas is not just a political totem for pols on the make.

Even at a wellhead price of, say, $1 per Mcf - or $1bn per Tcf - reserves are large in relation to GDP - 50Tcf would come to around six times GDP of current levels (around $8bn). In fact, the prospect of such a large quantity of gas was, it seems, behind the inclination of the then government to go for the US export deal [13].

Now, if there is no genuine alternative use for most of the reserves, it must be smart to take something for that portion for which otherwise Bolivia would get nothing.

The opposition's plan for industrialización is for precisely that alternative use - they say the gas could be the basis for a Walt Rostow-style industrial revolution take-off in Bolivia which would propel it towards the ranks of relative economic prosperity enjoyed by its neighbours, Chile and Argentina.

The topic for next time!

  1. If you think that's a cut/paste job, the guy's full name is Gonzalo Sánchez de Lozada y Sánchez Bustamante - according to a 10,000 word biography of the man. (The same site has a list of umpteen bios of world leaders, including current Bolivian president Carlos Mesa.)

  2. Which has its representatives in Congress: at the last general election on June 30 2002 Evo Morales's Movimiento al Socialismo (MAS) won 27 seats and Felipe Quispe's Movimiento Indígena Pachakuti (MIP) won 6 (out of a total of 130 seats in the Cámara de Diputados); MAS also picked up 8 (out of 27) in the Senate.

  3. Their detailed proposals in the Anteproyecto de Ley dated August 21 2002.

  4. Information from a 100 page document (DOC) Repsol en Bolivia from the useful CEDIB site (Centro de Documentación e Información Bolivia). The piece is mostly directed to the environmental impact of Repsol (one of the largest oil and gas concessionaries in Bolivia), but, incidentally, a lot of information is produced. The opening section is a history of the industry as a whole, with potentially valuable detail not covered in other sources (eg, going back further in time.)

  5. The process of capitalización - even though it involved only a small amount of Bolivian gas reserves - is basic to an understanding of the situation (I'm pretty sure: I have yet to achieve that nirvana personally!).

    A Venezuelan paper on the subject (by Mora) is useful; a short piece has a handy summary of the legal background; there is material in the Repsol paper noted above.

  6. Another CEDIB paper, Exportación de Gas Boliviano a EE UU ¿Oportunidad o amenaza para la economía boliviana?, discusses these points (p5ff).

  7. The best description of the current - 2002 - O&G industry is Estructura del Sector Hidrocarburos 1990-2002, a paper from UDAPE.

    Additional information in the paper El Sector del Gas Natural en Bolivia and this (all PDF).

    This is no place for a teach-in on the numbers. But, ball-park - total gas reserves are around 50 trillion cubic feet - half proven (P1) half probable (P2). Andina and Chaco's initial share together came to around 5Tcf. The DOE Energy Brief is the best single-page summary.

  8. UDAPE paper p39a. Abbreviations: according to Nickles abbreviation list, Tcf is trillion, Mcf is thousand. Good enough for me! A propos, gas is sometimes measured in British thermal units - there are 1,025 cubic feet to a BTU, according to this.

  9. There is a jolly little CEDIB Powerpoint slideshow putting the royalty take at around $40m a year.

  10. At least, I can't recall seeing the numbers quantified. The UDAPE report (PDF) on the Bolivian economy in the first half of 2003 (p27a), pulls out the O&G component of Bolivian state revenues - but only as far as royalties and transaction taxes (IT, IVA, IEHD): income tax (IUE) for O&G operations is not mentioned. The other UDAPE paper (p25a) has a table showing the theory of taxation of O&G revenues.

    There's a guide to Bolivia's fiscal alphabet soup from the national chamber of commerce.

  11. Ley 1689 - this page has the texts of laws going back to 1979-80. It's much easier if you know the number - by which laws are generally referred to in Bolivia.

  12. Note [7] El Sector p7a.

  13. Note [6] p8:
    según el ex Ministro de Desarrollo Económico Carlos Kempff, "la relación reserva mercado es de 760 años, 80% de las reservas certificadas no tienen mercado"

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